Franchise Agreement Template

(This is not Legal Advise by Precedents Online or their Authors)

1.  General Law Governing Franchising

The term ‘franchising’ is normally used in connection with either a business format form of franchise or in connection with a product and trade mark franchise.  Under a business format form of franchise, the Franchisor grants to the franchisee not only the right to use the franchisor’s trade marks but also the right to use an entire business format in accordance with which the franchisee must carry on their business.  

Franchising in Australia is governed by the Franchising Code of Conduct.  The Franchising Code of Conduct is a mandatory industry code of conduct that has the force of law under theCompetition and Consumer Act 2010 (Cth).

The definition of ‘franchise agreement’ in the Franchising Code of Conduct is wide.  An agreement exhibiting the features specified in Clause 4(1) of the Code, will be a franchise agreement for the purposes of the Code.

2.  The Code

The Franchising Code of Conduct is contained in a Schedule to the Trade Practices (Industry Codes — Franchising) Regulations 1998 (the Code).  A Franchising Code of Conduct compliance manual for franchisors and master franchisees is available free of charge from the Australian Competition and Consumer Commission website www.accc.gov.au.

2.1  Disclosure

Under the Code, franchisors and master franchisees (or sub-franchisors as they are sometimes known) must give a franchisee the following documents at least 14 days before the franchisee enters into, renews or extends a franchise agreement or pays a non-refundable deposit in relation to a franchise agreement:

a)  A copy of the code.

b)  A disclosure document in the required form.

c)  A franchise agreement in the form it is to be executed.

The Code also requires that a franchisor:

i)   Informs the franchisee of any materially relevant facts about the franchise (for example, certain court proceedings) within 14 days after the franchisor becomes aware of them.

ii)   Gives a copy of a current disclosure document to the franchisee within 14 days after a written request to the franchisor, as long as only one request has been made within the last 12 months, not including a request made under a right of renewal. 

Long and short form Disclosure Documents can be downloaded for free from the Australian Competition and Consumer Commission website www.accc.gov.au.

2.2  Franchise agreements

The Code gives franchisees certain rights.  In particular:

a)  A cooling off period.  A franchisee may terminate a franchise agreement within 7 days after entering the agreement, or paying any non-refundable money, whichever is earlier.  If the franchisee exercises their cooling-off period, they must be given a refund minus any reasonable expenses incurred by the franchisor within 14 days.

b)  Freedom of association.  A franchisor is prohibited from preventing franchisees forming an association.

c)  No general release.  A franchise agreement entered into on or after 1 October 1998 must not contain, or require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisee.

d)  No waivers.  A franchise agreement must not contain, or require a franchisee to sign, a waiver of any verbal or written representation made by the franchisor. 

Precedents

 Franchise agreement checklist
 Franchise agreement
 Guarantee and indemnity (Annexure A to Francise agreement)
 Non competition covenant (Annexure B to Franchise agreement)
 Covenants for a sublease (Licence to occupy premises)

2.3  Dispute resolution

Every franchise agreement must have a dispute handling procedure that complies with the Code.  Any party to a franchise agreement who has a dispute with another party to the agreement may engage the Code’s dispute resolution procedure.  The Office of the Franchising Mediation Adviser provides mediators for resolving disputes using the dispute resolution procedure set out in the Code.

3. Master Franchising

Master franchising is popular with service franchises.  Service franchises are those which involve the franchisee selling services rather than goods.  Service franchises are common in the home services, cleaning and courier industries.  Often there will be no retail premises involved, with the franchisee operating from home.  The use of a vehicle will be a critical element of the franchise.

A feature of service franchises is the high number of individual franchisees.  To avoid creating a large head office bureaucracy master franchising can be used to delegate the responsibility of growing, developing and monitoring the network in a territory to a master franchisee.

The definition of ‘franchisor’ in Clause 3 of the Code includes a master franchisee.  Clause 3also states that ‘subfranchisor has the same meaning as master franchisee’. 

The grant of a master franchise is very similar to the grant of a franchise.  However, the terms of the master franchise and the responsibilities of the master franchisee are different from those of a franchisee.  A franchisor must provide a master franchisee with a disclosure document, a cooling off period and other arrangements applicable to franchisees under the Code.

While a master franchisee is entitled to receive a disclosure document, the Code is not clear about whether it must also provide one to franchisees.  The better practice is to do so, particularly if the master franchisee is a party to the franchise agreement.

3.1  Structure of Master Franchise

The master franchise arrangement can be structured in such a way that the master franchisee can be a prime contracting party, an agent of the franchisor, or a joint contracting party.  The franchisor will normally wish to protect the business format, systems and image that the franchisor has developed, but otherwise the nature of the master franchising arrangement can be structured to suit the needs of the particular network.

When creating master franchise arrangements consider the prohibition of Pyramid selling schemes in Division 3 of the Australian Consumer Law.  This prohibition may well render some methods of master franchising illegal.

3.2  Content of master franchise agreements

The Code imposes the same obligations upon a franchisor concerning the content of a master franchise agreement as apply to the content of a franchise agreement. A ‘franchisee’ is defined in clause 3 of the Code to include ‘a subfranchisor in its relationship with a franchisor’.

Precedent

 Master franchise agreement

4.  Sale of Franchise

The Code imposes certain restrictions and obligations upon a franchisor and a franchisee in connection with the transfer or assignment of a franchise and the sale of a franchised business.

Clause 20 of the Code deals with the process of transfer of a franchise.  Sometimes transfer of a franchise is referred to as ‘novation’ of a franchise.  A franchisee may make a request t for the franchisor’s consent to transfer and the franchisor may not unreasonably withhold consent.

The franchisor is deemed to have given consent to the transfer if the franchisee or does not, within 42 days after the request was made, give to the franchisee written notice that consent is withheld. Reasons must be given.

The circumstances in which it is reasonable for a franchisor to withhold consent include the following:

a)  The franchisee has breached the franchise agreement and has not remedied the breach.

b)  The franchisee has not paid or made reasonable provision to pay amounts owing to the franchisor.

c)  The proposed transferee does not meet the selection criteria of the franchisor.

d)  The proposed transferee is unlikely to meet the financial obligations that the proposed transferee would have under the franchise agreement.

e)  The proposed transferee does not meet a reasonable requirement of the franchise agreement for the transfer or novation of a franchise.

f)  Agreement to the transfer or novation will have a significantly adverse effect on the franchise system.

g)  The proposed transferee does not agree in writing to comply with the obligations of the franchisee under the franchise agreement.

Procedure for transfer of a franchise

1. Check terms and conditions of the franchise agreement itself in relation to  what is required for  transfer.
2. Vendor issues the franchisor’s current disclosure documents to the purchaser.
3. Purchaser returns acknowledgement of receipt of the disclosure documents. 
4. Franchisor conducts due diligence in respect of the proposed transferee.
5. Purchaser (transferee) conducts due diligence of franchise business.
6. Franchisor gives decision regarding consent within 42 days of request.
7. Sign transfer documents.

Precedents

 Sale of franchise checklist
 Deed of consent 

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